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24/08/2019 | Situation Reports: Germany Veers toward Recession in 3Q

SUMMARY: The Bundesbank added to a growing list of negative indicators this week when it warned that Germany would likely enter recession in the third quarter.


The bank is projecting ‘lackluster’ growth over the current quarter, culminating in what’s expected to be a slight contraction. Since the German economy shrunk by 0.1% in the second quarter, such a result would represent a technical recession, which in and of itself is no cause for serious concern. However, if certain negative trends in global trade patterns persist, then Germany’s export-reliant economy could be in for a bumpy ride for the foreseeable future.


Germany – a country known for its robust industrial policy and prudent fiscal stewardship – is seldom the negative exception on a continent that is otherwise still in growth mode. But the nature of the current disruption in global markets – trade barriers, supply chain disruptions, and currency volatility – strikes at the heart of Germany’s export-dependent model.

It is thus no surprise that flagging industrial production and a sharp drop in German exports are behind the country’s recent economic doldrums. Over the past year, exports have fallen by approximately 8% and industrial production has dropped by 5.2%.

Though it’s undeniable that German manufacturing is reeling, there are still several bright spots for the economy. For one, despite a recent downward blip, the service sector has remained resilient. Real estate has also been booming alongside other euro zone countries.

But perhaps Germany’s most valuable trump card for avoiding a protracted downturn is its fiscal wiggle room vis-a-vis other distressed economies like Italy. Berlin has been running a primary surplus for the past five years; it currently weighs in at around 1.7% of GDP. Consequently, the Merkel government has plenty of options for stimulating the economy, and there are reports that it’s preparing to do just that. According to Bloomberg, the government is putting together a spending package aimed at bolstering domestic consumption and incentivizing big-ticket purchases such as new cars and appliances. Social spending would also be boosted to increase incomes for those on state assistance.

There is no shortage of compelling political subtext on offer here. On the European level, a deep recession would cast the ongoing Brexit saga in a very different light, and though it’s highly unlikely that Brussels would give ground on any of its red lines (including a renegotiated backstop), EU negotiators may be more inclined to adopt a softer tone given the increasingly unpalatable fallout of a no-deal Brexit. Yet it should be noted that the timing doesn’t entirely match up since a deep German recession would presumably materialize after the current and supposedly immutable October 31 deadline.

There’s also German politics to consider. The Merkel government is shaky, both figuratively and literally following a series of health-related incidents surrounding the chancellor. Just how long the Social Democrat Party (SPD) wants to perpetuate the self-harm of remaining in federal coalition has always been a burning question; the party’s latest electoral flop came just a few months ago when it shed approx. 10% from its 2014 support levels in European parliamentary elections and lost control of Bremen – a state that it had ruled for over 73 years. There are several scenarios that could precipitate a change at the highest level of German politics, and all of them are made more likely by the country slipping into a deep recession.

A longer-term question worth considering is what this all means for Germany’s export-led growth model. Or in other words: Is this recession the exception or the rule going forward? Germany’s growth miracle was in many ways a product of the specific conditions of the Cold War era, when competitors were largely based in the West and German companies like Volkswagen and BMW had a technological competitive advantage. Can Berlin continue its yearly surpluses and industrial facilitation of old amidst this new competitive environment? Only time will tell. (Canadá)


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